Netflix Doesn&#39;t Disappoint, Again

How do you spell 25% subscriber gain and increased profit and revenue at a lower cost? N-E-T-F-L-I-X.

Defying analyst concerns that the Los Gatos, Calif.-based online DVD rental pioneer couldn't emulate, let alone surpass, its previous quarterly results, Netflix Inc. posted second-quarter (ended June 30) profit of $26.6 million, up $1 million from income of $25.6 million during the previous year period.

Revenue jumped 11% to $337.6 million from $303.7 million last year due to the addition of nearly 1.7 million subscribers from the same period last year. Netflix now has more than 8.4 million subscribers.

Getting those new subscribers cost Netflix $28.95 each, down $15.07 each from last year ($44.02), and Netflix's lowest subscriber acquisition cost (SAC) as a public company.

Churn, the number of free and paying subscribers who do not renew their monthly service, fell to 4.2% compared to 4.6% last year.

“We are pleased to announce another quarter of strong financial results,” said Reed Hastings, co-founder and CEO of Netflix.

Hastings said the DVD by-mail rental market will continue to grow over the next five to 10 years despite industry-wide flat DVD revenue through the first half of 2008. He said the rise in DVD rental kiosks and by-mail delivery will continue to proliferate the industry at the expense of the traditional video store.

Hastings said the company will not emulate video-on-demand (VOD) and ad-supported streaming business models proffered by Apple, Amazon, Sony, Hulu and YouTube.

“Those segments will likely be substantial, but our subscription segment will also be large and will provide [us with] plenty of room for growth over the coming year,” he said in a call with investors. “We're not trying to block them. I don't know of them trying to block us. These are really different segments … the ad support, the pay-per-view segment, and the subscription segment.”

He wouldn't disclose the number of Netflix subscribers who stream instant content or sales figures of the Netflix player set-top box manufactured by Roku Inc.

Hastings has stated a desire to generate enough deals with consumer electronics manufacturers that would translate into nearly 10 million consumers connected to Netflix via their Internet-enabled TV.

The CEO said the company will continue to aggressively market having its instant streaming service integrated into Blu-ray Disc players, game consoles, connected DVDs and standalone Internet devices.

He said Blu-ray rentals continued to be very low, but the formant showed promise over the next couple of years, particularly through Christmas if player prices fall significantly.

“This will be the first Christmas where there are dedicated [Blu-ray] players at more aggressive prices,” Hastings said.

As for Netflix's Blu-ray prices, Hastings said the company will begin testing Blu-ray price increases and, depending on results, may move forward implementing higher prices for Blu-ray.

The executive attributed the company's record low SAC to a reduction in marketing spending as a percentage of revenue.

“We are trying to push the market less hard than we have in the past,” he said.

When asked why he wouldn't target more subscribers because of the low SAC, Hastings agreed there existed an argument for curbing earnings in favor of sub growth.

“But at the end of the day, we think it's better to stick to our earnings targets, despite these great opportunities,” he said.

Some analysts said Netflix also benefited from skyrocketing gasoline costs that kept many consumers at home and out of movie theaters. A recessionary economy, and rival Blockbuster Inc.'s preoccupation with attempting to acquire consumer electronics retailer Circuit City Stores Inc., helped as well.

“I think it did, but hard to quantify,” said Edward Woo with Wedbush Morgan Securities in Los Angeles. “[They] didn't mention Blockbuster and Circuit City on the call, though they did say competition remains active.”